Illinois Supreme Court Resolves Conflict Within Appellate Districts...
April, 2007
Illinois Supreme Court Resolves Conflict Within Appellate Districts:
CGL Insurer Need Not Defend Or Indemnify Employer Sued In Third-Party Contribution Action Because There Is No "Insured Contract"
In Virginia Surety Co., Inc. v. Northern Ins. Co. of N.Y., --- N.E.2d ---, 2007 WL 121161 (Ill. 2007), the Illinois Supreme Court holds that when an employer has agreed in a contract to be responsible for unlimited contribution liability in a claim involving injury to its employee, that means the employer has volunteered to remain responsible for its own full pro rata share of the damages notwithstanding the limited liability protections afforded under the Workers’ Compensation Act. Conversely, resolving a conflict within the appellate districts, the Illinois Supreme Court has determined that under such facts the employer has not agreed to assume the tort liability of another, the CGL insurer does not owe any “insured contract” liability, and therefore the CGL insurer does not owe any duty to defend or indemnify.
Facts
The particular facts under review involved a fairly typical situation of an employee of a subcontractor/employer injured in a construction setting, the employee/injured person then sues another party (such as a general contractor) in a common law suit, the general contractor in turn files a third-party complaint against the subcontractor/employer, and the subcontractor/employer tenders the third-party complaint both to its Employer’s Liability (EL) insurer and its Commercial General Liability (CGL) insurer.
Capital, a general contractor, hired De Graf to work as a subcontractor at a construction site. James Smith, an employee of De Graf, was injured while working at the site. Smith sued Capital to recover for his injuries. Capital filed a third-party complaint against De Graf, seeking contribution. De Graf tendered the defense of the complaint both to its EL insurer, Virginia Surety, and its CGL insurer, Northern Insurance (Northern). Virginia Surety defended but Northern did not based on the employer’s liability exclusion in the CGL policy. Virginia Surety filed a declaratory judgment action, seeking a declaration that Northern owed a duty to defend and indemnify De Graf in the contribution action.
The contract between Capital and De Graf contained the following provision:
To the fullest extent permitted by law, the Subcontractor waives any right of contribution against and shall indemnify and hold harmless, the Owner, Contractor, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses, and expenses . . . arising out of or resulting from performance of the Subcontractor’s Work under this Subcontract, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death or to injury to or destruction of tangible property (other than the Work itself) including loss of use therefrom, which is caused in whole or in part by negligent acts or omissions of the Subcontractor, the Sub-contractor’s subcontractors, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, loss or expenses is caused in part by a party indemnified hereunder.
De Graf’s CGL policy with Northern excluded coverage for bodily injuries to De Graf’s employees. However, as an exception to this exclusion, Northern would pay sums for “liability assumed by the insured under an ‘insured contract’” which was defined as follows:
“That part of any other contract or agreement pertaining to your business . . . under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.”
Virginia Surety and Northern filed motions for summary judgment and the trial court granted Northern’s motion. The appellate court affirmed finding that because the third-party complaint against the employer sought only contribution and not indemnity, Northern did not owe any duty because insured contract liability only applies when indemnity is sought.
Analysis
The Illinois Supreme Court analyzed the case based on the progression of Illinois law up to this point. In Kotecki v. Cyclops Welding Corp., 146 Ill.2d 155, 585 N.E.2d 1023 (Ill. 1991), the Illinois Supreme Court held that an employer’s contribution liability to a third-party plaintiff was limited to the amount of workers’ compensation benefits paid to the injured party (i.e., the employee) under the Compensation Act 820 ILCS 305/5 (i.e., the Kotecki cap). In holding that a third-party plaintiff may seek contribution limited only by the amount of workers’ compensation benefits paid by the employer, the Illinois Supreme Court upheld a third-party’s right to contribution, while preserving the employer’s important right to rely on the protection of the Workers’ Compensation Act. Braye v. Archer-Daniels-Midland, 175 Ill.2d 201, 676 N.E.2d 1295 (Ill. 1997); Lannom v. Kosco, 158 Ill.2d 535, 540, 634 N.E.2d 1097 (Ill. 1994).
Thereafter, the Illinois Supreme Court decided that an employer can relinquish the cap on its contribution liability by contract: “We determine that nothing in Kotecki prohibits an employer from agreeing to remain liable for its pro rata share of damages proximately caused by its negligence, notwithstanding the employer’s ability to avail itself of the Kotecki cap on its liability.” Braye v. Archer-Daniels-Midland, 175 Ill.2d 201, 210, 676 N.E.2d 1295 (Ill. 1997). See also Liccardi v. Stolt Terminals, Inc., 178 Ill.2d 540, 687 N.E.2d 968 (Ill. 1997).
In Illinois, the EL insurer (and not the CGL insurer) traditionally responded to the third-party complaint for contribution against the employer, based on the existence of the employee exclusion contained in the CGL policy, according to Aetna v. Beautiful Signs, 146 Ill.App.3d 434, 496 N.E.2d 1229 (1986). An Illinois appellate court then decided in Christy-Foltz, Inc. v. Safety Mut. Cas. Corp., 309 Ill.App.3d 686, 722 N.E.2d 1206 (4th Dist. 2000), that when an employer, as in Braye, “agree[s] to remain fully liable for any and all claims, suits, losses, and expenses attributable to its own negligence,” it has voluntarily assumed a loss which is excluded by the EL policy. In such instances, then, the employer has called upon the coverage under its CGL policy. In Michael Nicholas, Inc. v. Royal Ins. Co. of America, 321 Ill.App.3d 909, 748 N.E.2d 786 (2d Dist. 2001), an Illinois appellate court determined for the first time that the term “tort liability” in a CGL policy was ambiguous because it left open the possibility that the insured could agree to be responsible for another party’s liability in a tort action even if that liability was not based on that party’s own negligence, (i.e., the assumption of joint and several liability) and therefore the CGL insurer was liable for “insured contract” liability.
Another Second District Appellate Court case, West Bend Mut. Ins. Co. v. Mulligan Masonry Co., Inc., 337 Ill.App.3d 698, 786 N.E.2d 1078 (2d Dist. 2003), followed Michael Nicholas. The West Bend court agreed that the definition of “insured contract” was ambiguous and therefore would be construed liberally in favor of coverage. Also, based on the reasoning of Michael Nicholas, the court held that the employer/indemnitor waived its Kotecki cap under the hold-harmless and indemnity agreement, and therefore it assumed the tort liability of the nonemployer/indemnitee. In other words, if the employer’s Kotecki cap was lower than the amount of the plaintiff’s damages attributable to the employer’s negligence, then, under principles of joint and several liability, the nonemployer/third-party plaintiff can be held liable in tort for the difference. Relying on the indemnification clause, the nonemployer/third-party plaintiff attempted to recover that amount. If the employer waived its Kotecki cap, then it has assumed tort liability that otherwise would have been imposed against the nonemployer/third-party plaintiff. Justice McLaren vigorously dissented. West Bend, 337 Ill.App.3d at 708.
An earlier case in a non-construction setting stood in stark contrast to these decisions. In Hankins v. Pekin Ins. Co., 305 Ill.App.3d 1088, 713 N.E.2d 1244 (5th Dist. 1999), the Illinois Appellate Court held that an “indemnity provision” did not constitute an “insured contract” because, by agreeing to be held liable for unlimited contribution, the employer was simply agreeing to accept the full share of its “own negligence” and was not accepting the “tort liability of another party.” In other words, an “insured contract” is one where the insured agrees to indemnify the other party against that party’s own negligence. Because the employer’s potential liability under the provision did not come within the employer’s “insured contract” coverage, the insurer had no obligation to defend or indemnify it with respect to a third-party claim for indemnification. Hankins, 305 Ill.App.3d at 1093.
With this background established, the Illinois Supreme Court analyzed the agreement between Capital and De Graf under the terms of Northern’s CGL policy. The Supreme Court determined that under the policy’s plain language, the agreement between De Graf and Capital could not be an “insured contract.” By the plain language of the agreement, De Graf, as the indemnifying party, was required to “indemnify” Capital only for De Graf’s own negligence. Moreover, the court noted the potential confusion due to the use of the word “indemnity” because the De Graf-Capital contract was not a true indemnification clause; rather, “the effect of the provision is nothing more than a simple anticipatory waiver of an affirmative defense in a contribution action.” Preliminarily, the court noted that under ordinary rules of common law liability, Capital is liable to Smith for its own negligence and De Graf is liable to Smith for its own negligence. However, De Graf enjoys the option to limit its common law liability to Smith by asserting the affirmative defense provided by the Workers’ Compensation Act for the amount of its negligence up to the Kotecki cap. This leaves the portion of De Graf’s liability due to its pro rata share of the common liability above the Kotecki cap.
Braye allows De Graf to bargain away this affirmative defense by contract. Here, De Graf has waived its affirmative defense provided by the Workers’ Compensation Act and is liable for unlimited contribution, undiminished by the workers’ compensation limitation. Absent De Graf’s waiver, Capital would be obligated to pay a greater portion of the common liability only at De Graf’s election to raise its affirmative defense. Therefore, absent any contract or agreement, De Graf’s portion of the common liability above the Kotecki cap is not “imposed by law” upon Capital, but remains with De Graf. The waiver of the Kotecki cap does not shift liability; rather, the employer chooses to remain liable by not asserting an affirmative defense.
The court rejected West Bend’s conclusion that “Indemnification clauses like the one at issue here are intended to shift tort liability that otherwise would be imposed against the indemnitee” because the De Graf-Capital contract is not a true indemnification clause. The court further rejected the Christy-Foltz, Michael Nicholas, and West Bend courts’ assertion that the employer somehow assumes the joint and several liability of the third-party nonemployer as this argument conflated the indivisible nature of joint and several liability with the equitable apportionment of common liability under the Contribution Act. It is clear from the Contribution Act that “[n]o tortfeasor is liable to make contribution beyond his own pro rata share of the common liability.” 740 ILCS 100/2 (West 2000). Further, joint and several liability is indivisible, and “the feasibility of apportioning fault on a comparative basis does not render an indivisible injury ‘divisible’ for purposes of the joint and several liability rule.” If the Kotecki cap is lower than the amount of the employee’s damages attributable to the employer’s negligence, the third party does not then become liable for the difference. Instead, it always was jointly and severally liable regardless of the Kotecki cap and it always retained the right to sue in contribution. The distinguishing factor is the employer’s use of the affirmative defense of the Workers’ Compensation Act.
In sum, De Graf and Capital intended the subcontract provision to be a waiver of De Graf’s affirmative defense in a potential contribution action rather than any purported assumption of Capital’s joint and several liability. Therefore, the policy’s definition of “insured contract” has not been met. De Graf did not assume Capital’s “tort liability,” which the policy defines as “liability that would be imposed by law in the absence of any contract or agreement.” The court thus concluded that Northern did not owe any duty to defend or indemnify De Graf under the CGL policy, and to the extent that Michael Nicholas, West Bend, and Christy Foltz would hold otherwise, they were overruled.
Learning Point
This decision teaches that, under Illinois law, a CGL insurer should not generally be called upon to pay an insured’s contribution liability in claims involving bodily injury to its own employees even when the insured/employer has waived the protections of limited liability afforded under the Workers’ Compensation Act.
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